(Bloomberg) — China’s bond rally got a fresh shot in the arm from a key economic meeting, where promises of interest rate cuts helped send the benchmark yield to a fresh record low.
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The yield on 10-year government bonds slid below 1.8% for the first time in history, after officials vowed to cut policy rates as well as banks’ reserve ratios to boost a flagging economy. Earlier this week, the Politburo, China’s top decision-making body, pledged “moderately loose” monetary policy in its first policy pivot in nearly 14 years.
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The bond rally Friday is a reflection of the strong buying momentum seen all through this year, with even the prospects of an increase in debt issuance failing to deter bulls. China’s sovereign notes are set for their best weekly rally since early 2020, when the outbreak of the Covid pandemic spurred a rush to haven assets.
Bonds are still rallying despite signs of more supply because banks hold plenty of idle cash and expect the PBOC to keep liquidity loose, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “But the room for further declines is limited as the market has already priced in an interest-rate cut.”
On top of easing bets, bonds are also supported by concerns over a potential trade war with the US and a lack of other investment options amid fragile sentiment on stocks and the property market. China’s yield curve is close to the flattest since March in the one- to 10-year portion, a sign of pessimistic outlook on the economy.
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“There might be more rate volatility till next March, as the market struggles for details about China’s policy support,” said Serena Zhou, an economist at Mizuho Securities. “We anticipate a total interest rate cut of 60 basis points next year.”
Still, China’s reflationary policies will eventually bring yields back to levels above 2.2%, Zhou added.
A reduction in lenders’ reserve-requirement ratios may come as soon as Friday, according to Citigroup analysts including Philip Yin.
The benchmark yield traded as low as 1.765% Friday morning while Chinese stocks slid. Tianfeng Securities, Zheshang Securities and Standard Chartered Bank are among firms that predict the rate will drop to as low as 1.5%-1.6% by the end of next year.
